For John McGloin, Amara Mining's executive chairman, the mining sector is the definition of alchemy.
“You take a field that has little or no value and you do something to it, you create value” he told Mineweb on the sidelines of the European Gold forum.
But, while value was very easy to unearth in the mining sector in the early part of the last decade, it is increasingly difficult to find now – especially for the generalist investor that isn't well versed in the intricacies of drill results and the multitude of risks that can crop up between initial discovery and a mine at full production.
“I don't think you are going to see the market again like it was back in the early part of 2000, where you could take a punt on anything and do well,” McGloin says, adding, “I think the bull market in mining still has legs. It has now just become a stock pickers market.”
Part of the reason for this is that commodity prices have risen substantially in the intervening 12 years as huge swathes of China and other parts of the emerging world have moved from rural areas into cities and the middle class. At the same time, costs have risen substantially and miners themselves haven't entirely covered themselves in glory.
Especially in the last few years, there has been a large number of cost overruns, and under-delivery and the market has become increasingly impatient.
McGloin explains that when investor sentiment is at a high and money is flowing freely into the sector, the industry can afford to be realistic. But, as sentiment begins to wane, promises have to get bigger and bigger and, eventually, they hit a point where there is no way they can deliver on them.
“That is what happened around 2007, 2008,” McGloin says, “and this created an environment where investors could no longer see the wood for the trees.
The result of this has been increasingly tough questions being asked of mine management and a sharp and sudden focus on costs at the expense of growth.
Where does this leave investors?
According to McGloin a few key things stand out.
“Investors need to look at management teams that are credible, that are making the right promises and they need to be more discerning and not accept at face value what management is saying.”
“You need to question everyone and make sure there is enough headroom in the project so that if management has been a bit too optimistic or has made a mistake that there is enough fat to cover it when things go wrong.”
The second thing to understand is that one can't build an investment strategy on what the market looks like today, “you have to have a longer term time horizon,” he says.
And, depending on exactly what that horizon is, he says, you should be looking at different companies. “Barrick, has a large base of operations, it has cash flow, etc, so you can put your money in there and watch how it goes, the investment horizon on that is a week, a month a year.”
“But, a smaller company, like Amara for example, you have to be thinking on a longer time horizon and if you go down to the explorer level then the investment horizon is even longer, 2, 3 , 4 years.
On the other side of the equation, McGloin says it is critical that management doesn't fall in love with their project.
“If a project doesn't work, you need to be able to identify that and say so. You have to be honest with yourself and with your shareholders.”
He adds, that single asset companies are particularly vulnerable on this point because there is nowhere to go if the asset doesn't work.
“People believe in the team first and the asset second. That is how you grow a premium-rated company, the value is not just the asset it is the team that stands behind it - a team that can deliver on a project but, equally as important, one that will tell you if it won't work and then go and find a new one.”